Title

Presentation

Danaher Corporation beats earnings expectations. Reported EPS is $2.36, expectations were $2.25.

Operator: My name is Ashley and I will be your conference facilitator this morning. At this time, I would like to welcome everyone to Danaher Corporation’s First Quarter 2023 Earnings Results Conference Call. I will now turn the call over to Mr. John Bedford, Vice President of Investor Relations. Mr. Bedford, you may begin your conference.

John Bedford: Thank you, Ashley. Good morning, everyone and thanks for joining us on the call. With us today are Rainer Blair, our President and Chief Executive Officer; and Matt McGrew, our Executive Vice President and Chief Financial Officer. I’d like to point out that our earnings release, the slide presentation supplementing today’s call and the reconciliations and other information required by SEC Regulation G relating to any non-GAAP financial measures provided during the call are all available on the Investors section of our website, www.danaher.com, under the heading Quarterly Earnings. The audio portion of this call will be archived on the Investors section of our website later today under the heading Events and Presentations and will remain archived until our next quarterly call.

A replay of this call will also be available until May 9, 2023. During the presentation, we will describe certain of the more significant factors that impacted year-over-year performance. The supplemental materials describe additional factors that impacted year-over-year performance. Unless otherwise noted, all references in these remarks and supplemental materials to company-specific financial metrics relate to the first quarter of 2023 and all references to period-to-period increases or decreases in financial metrics are year-over-year. We may also describe certain products and devices which have applications submitted and pending for certain regulatory approvals or are available only in certain markets. During the call, we will make forward-looking statements within the meaning of the federal securities laws, including statements regarding events or developments that we believe or anticipate will or may occur in the future.

These forward-looking statements are subject to a number of risks and uncertainties including those set forth in our SEC filings and actual results might differ materially from any forward-looking statements that we make today. These forward-looking statements speak only as of the date that they are made and we do not assume any obligation to update any forward-looking statements, except as required by law. With that, I’d like to turn the call over to Rainer.

Rainer Blair: Thank you, John and good morning everyone. We appreciate you joining us on the call today. So we had a good start to the year. Our team successfully navigated a dynamic operating environment to deliver better-than-expected revenue earnings and cash flow. We are especially pleased with the strength of our base business, which grew 6% in the first quarter. Now across the portfolio, the quarter progressed largely as we anticipated. Our global supply chain has stabilized and component availability improved sequentially. Strong price realization helped offset inflationary pressures and disciplined cost management enabled us to continue our cadence of growth investments. So we believe these investments paired with DBS-driven execution contributed to market share gains in many of our businesses again this quarter.

A prime example of the power of DBS and our commitment to continuous improvement at all levels of Danaher as the CEO Kaizen, which we kicked off 2 weeks ago. With this event, our most senior leaders are joining over 700 associates at 10 of our operating companies. We are focusing on the most significant opportunities for lasting competitive advantage across our businesses, including further reducing our best-in-class lead times at Aldevron and improving resin and filter throughput in the biotechnology group. The CEO Kaizen is just another terrific opportunity for our teams to come together and drive transformative change through DBS. In fact, once we wrap up here today, I will be joining the Cytiva team at our resin facility in Uppsala, Sweden, to contribute to these efforts.

Now our results also reflect the unique positioning of Danaher’s portfolio. We just have an exceptional group of leading franchises serving attractive end markets with durable secular growth drivers. Additionally, the strength of our balance sheet provides us with the optionality to enhance our businesses both organically and through disciplined M&A. This powerful combination of our talented team, leading portfolio and strong financial position, differentiates Danaher and reinforces our sustainable long-term competitive advantage. So with that, let’s turn to our first quarter results. Sales were $7.2 billion in the first quarter and core revenue declined 4%. So as I mentioned earlier, we delivered 6% core revenue growth in our base business with three of our four reporting segments, up high single-digits or better in the quarter.

COVID-19 revenues were a headwind of approximately 10%. Geographically, core revenues in developed markets declined mid single-digits, primarily as a result of lower COVID-19 revenues. High-growth markets were up low single-digits, with a low single-digit decline in China. Results in China were better than expected driven by a quicker-than-anticipated recovery in diagnostic testing and a more favorable life science research funding environment. We expect these positive trends to continue as we move through the year. Our gross profit margin for the first quarter was 61%. Our operating margin of 25% was down 330 basis points primarily due to the impact of lower COVID volume in our biotechnology and diagnostics businesses. Adjusted diluted net earnings per common share were $2.36 and we generated $1.7 billion of free cash flow in the quarter.

Now, let’s take a closer look at our results across the portfolio and give you some color on what we are seeing in our end markets today. Reported revenue in our Biotechnology segment declined 16% and core revenue was down 13%. In bioprocessing, base business core revenue growth was in line with our expectations of low single-digits in the first quarter. Flying demand at our large customers, were primarily responsible for therapies in commercial production and later-stage clinical trials remains robust and they are steadily working through inventory they built during the pandemic. Based on our most recent customer conversations, we now expect the inventory normalization process to continue through the second half of the year. During the quarter, we also saw softer demand globally at many of our emerging biotech customers as more pronounced pressures on liquidity and funding accelerated their efforts to conserve capital leading to project delays and cancellations.

In consideration of these factors, we anticipate second quarter and full year base business core growth in bioprocessing will be largely consistent with the first quarter. That said these short-term pandemic-related dislocations have not changed our assessment of the tremendous opportunity ahead in the biologics market and for our leading bioprocessing franchise. The number of biologic and genomic medicines in development is meaningfully higher than at any point in history. In fact, there are thousands of biologic therapies currently under development, including more than 750 in Phase 3 clinical trials. With these therapies, our customers are making significant strides in addressing diseases that affect large segments of the population. For example, GLP-1s have become blockbuster treatment for obesity and diabetes and antibody drug conjugates are meaningfully improving treatment outcomes for many types of cancer.

And we are also seeing promising developments in the field of Alzheimer’s research where several novel monoclonal antibodies are nearing regulatory approval. Now to best support our customers as they pursue these life-changing breakthroughs, our biotechnology team has been accelerating investments and innovation over the last several years. Cytiva recently introduced the MabSelect VL, a new resin and ligand for bispecific antibodies and antibody fragments. The MabSelect VL’s best-in-class finding capacity and improved alkaline stability makes industrial scale purification more efficient, helping customers improve yields, decrease bioburden and reduced manufacturing costs. This is just one of the innovative solutions from our biotechnology team’s project pipeline aimed at helping customers bring more life-saving therapies to market faster and more efficiently.

Turning to our Life Sciences segment, reported revenue grew 2.5% and core revenue was up 5%, including high single-digit growth in our base business. Our Life Sciences instruments businesses collectively delivered mid single-digit core revenue growth, consistent with our expectations. Funding levels and sales funnels remained healthy across most major geographies and end markets. The demand for our advanced solutions remains strong, notably for recent innovations such as the SCIEX ZenoTOF7600 and Leica Microsystems, Mica. Our genomics consumables business had another quarter of double-digit base business core revenue growth. Robust demand for plasmids, proteins and gene writing and editing solutions was partially offset by declines in next-generation sequencing and basic research.

During the quarter, Aldevron brought together capabilities from Cytiva and Precision Nanosystems to create a streamlined offering for the development, production and release of mRNA drug substance and drug product. This new offering will be available to customers later this year and is a great example of how we are integrating solutions from across Danaher to create differentiated offerings and deliver even greater value to our customers. Moving to our Diagnostics segment, reported revenue declined 10% and core revenue declined 7.5% with double-digit growth in our base business, offset by lower COVID-related respiratory testing volumes at CES. Our clinical diagnostics businesses collectively delivered mid single-digit core revenue growth and saw healthy market volumes globally.

At Radiometer, strong demand for blood gas testing in China drove double-digit core growth. Leica Biosystems grew mid single-digits, led by advanced staining and digital pathology. Strength across developed markets and China enabled Beckman Coulter Diagnostics to exceed expectations and deliver mid single-digit core growth. On Molecular Diagnostics, broad-based strength across Cepheid’s test menu drove more than 30% core growth in non-respiratory testing. As our customers look for ways to capitalize on the workflow advantages, the Cepheid GeneXpert delivered for COVID-related testing, they are increasingly adding additional assays from our market leading test menu. This increased menu utilization by our customers helped drive more than 50% growth in infectious disease testing in the first quarter.

We also saw good momentum for our recently introduced vaginitis panel, the Xpert Xpress MVP, which contributed to nearly 30% growth in sexual health testing. In COVID-related respiratory testing, customers continued transitioning high throughput testing to the point of care and consolidating their point-of-care PCO testing platforms onto the GeneXpert. As a result, Cepheid’s respiratory testing revenue of approximately $550 million in the quarter exceeded our expectation of $450 million. This was driven both by higher volumes and the preference for our 4-in-1 test for COVID-19, Flu A and B and RSV. We continue to expect approximately $30 million respiratory tests and $1.2 billion of revenue for the full year. Cepheid’s strong results are a testament to the significant value and unique combination of fast, accurate lab quality results and the best-in-class workflow provides clinicians.

Given Cepheid’s leading global installed base and growing adoption of the broadest molecular diagnostic test menu on the market, we are well positioned to help customers meet their testing needs and continue gaining market share for years to come. Moving to our Environmental & Applied Solutions segment, reported revenue grew 5% and core revenue was up 6.5%. Water quality core revenue grew low double-digits and product identification was up low single-digits. In water quality, Hach delivered their fourth consecutive quarter of double-digit growth, and ChemTreat was up double-digits for the eighth consecutive quarter. Strength was broad-based across both equipment and consumables, particularly in our industrial end markets. This performance highlights the resilience of the high-margin recurring revenue business model that make up water quality and the significant value our solutions provide in support of customers’ day-to-day mission-critical water operations.

At Product Identification, marking and coding was essentially flat, while packaging and color management was up low single-digits. Videojet was up low single-digits despite a difficult year-over-year comparison as the business grew high single-digits in Q1 last year. Our growth investments are driving a healthy cadence of new product innovation at Videojet. In fact, in March, the team released the 15 ADC continuous inkjet printer the industry’s first dedicated soft pigmented solution. The 15 ADC uses soft pigmented inks to print codes with consistent quality, excellent contrast and strong durability to avoid degradation and fading during production runs, helping customers reduce production downtime. So this is the first of several new product introductions Videojet has planned for the year and is a great example of how our teams are bringing impactful solutions to our customers.

In February, we announced that our environmental and applied segment will be named Veralto, when it is launched as a stand-alone company and that it will be headquartered in Waltham, Massachusetts. This is an exciting milestone for the team, and they are making considerable progress towards becoming a separately traded public company. And we remain on track for our fourth quarter 2023 separation and look forward to sharing more details in the coming months. So now let’s briefly look ahead to our expectations for the second quarter and the full year. In the second quarter, we expect core revenue in our base business to be up mid-single digits. We also expect total core revenue to decline high single digits as a result of lower demand for COVID-19 testing, vaccine and therapeutics.

Additionally, we expect a second quarter adjusted operating profit margin of approximately 26% and which reflects efforts to adjust our cost structure and capacity in response to COVID transitioning to an endemic state, particularly within our Diagnostics and Biotechnology businesses. Now turning to the full year 2023. Despite the near-term and temporary challenges within bioprocessing, we anticipate mid-single-digit core growth in our base business. We also expect total core revenue to decline high single digits for the year as a result of lower demand for COVID-19 testing vaccines and therapeutics. Additionally, we expect a full year adjusted operating profit margin of approximately 30% and which reflects the previously mentioned efforts to adjust our cost structure and capacity in response to COVID-19 transitioning to an endemic state.

So to wrap up. We’re pleased with our strong first quarter results. Our well-rounded performance is a testament to the durability and balanced positioning of our portfolio and our team’s commitment to leading and executing with the Danaher Business System. While the transition of COVID-19 from a pandemic to an endemic state is causing near-term disruption, there is no doubt that the past 3 years have helped shake Danaher into a better, stronger company. We meaningfully changed the scale of our bioprocessing business, with the addition of Cytiva and the creation of the biotechnology group and Cepheid’s expanded installed base that significantly improved their competitive advantage. We’ve also increased our cadence of innovation and strategically deployed capital through M&A, including the acquisition of Aldevron to accelerate our future growth trajectory.

So there is a bright future ahead for Danaher, the combination of our talented team, differentiated portfolio of businesses and strong balance sheet, all powered by the Danaher Business System provide us with a strong foundation to create value for many years to come. And so with that, I’ll turn the call back over to John.

John Bedford: Thank you, Rainer. That concludes our formal comments. Ashley, we are now ready for questions.

Operator: We will take our first question from Michael Ryskin with Bank of America. Please go ahead.

John Bedford: Good morning, Michael.

Michael Ryskin: Good morning. Thanks for taking the questions, guys. First, I want to start on the bioprocessing inventory challenges. You’ve been dealing with this issue for almost a full year now and you’ve had to revise your outlook lower for fiscal year ‘23 a number of times. Why is the visibility there into inventory is so challenging? And how do you know that this latest view of plus low single digits for the year is the right view and there is not further cuts going down the road?

Rainer Blair: Thanks, Michael. Look, undoubtedly, visibility has been choppy here on the way up as COVID tailwinds fueled our growth. And now as we try to drive the soft landing visibility has been impacted. And I would tell you that normally, we have visibility of 9 to 12 months that’s very solid. But it is so that in the last quarters, that has been probably more like 3 to 6 months related to a number of factors. And let me lay some of those factors out for you here, Michael. Sort of starting with the first quarter. So in the first quarter, our base business in bioprocessing grew about 100 basis points, 1%. And if you unpack the growth there, large accounts that are responsible for commercial production and later-stage clinical trials are growing at mid-single digits.

So they are burning off inventory. And I’ll come back to that. And then you have sort of emerging biotech and those companies that are more involved in discovery and earlier-stage clinical trial phases, which represent about 20% to 30% of our business and they are down mid-teens. So overall, this is what gets us to this sort of low single-digit growth view for the year. Now let me come back to the larger accounts here for just a second. We see in large biopharma that, in fact, the demand is there, the inventory is burning off, but it is slower than expected. And the reason for that is that we’re starting to see larger pharma companies as well as larger CDMOs replan and recalibrate their own production plans as they start to conserve working capital and cash.

And we saw some of that also back in 2016. So we’re seeing larger customers also look at their own finished goods, if you will, inventories and starting to adjust their production plans in order to bring those down as well. So if you then transition over to, again, emerging biotech, so the companies that are working more in discovery and earlier stage. There – we have been observing funding headwinds for, call it, since the second half of the prior year. But those funding headwinds became significantly more pronounced here in the first quarter. And so we’re seeing these accounts looking to conserve cash by prioritizing projects. We see that with lower OpEx and CapEx expenditures, also see a number of layoffs happening in that particular segment.

And that’s not just happening in the U.S. We also see that happening in China. And so we’re assuming that barring any other sort of wildcards here, that it doesn’t get significantly worse, but that this continues to play out for the remainder of the year.

Matt McGrew: Mike, it’s Matt. Maybe we could give you a little bit of kind of context around January to kind of the guide in January to where we ended up. I know Rainer sort of mentioned it, but I think it’s important to kind of think about it in the two buckets. So we’ve got the larger biotech – or the larger customers that we’ve got, most of their stuff is sort of Phase 3 clinical on market. In January, our assumption was that, that was going to be kind of, call it, high single-digit growth from those customers. So 70% or so of our customers kind of growing at 7%, 8%. And then kind of the remaining 20%, 25% of the customers, which we’re sort of referring to as emerging biotech, not everything in there is probably technically emerging, but that other piece of the customers in January, we thought that was going to kind of be about low double digits to kind of low teens growth.

And you add all that up and that would have been the high single-digit growth that we thought we were going to see here for the year. Like Rainer said, what we saw in Q1 was just, frankly, not that supportive of that kind of ramp as we think about what we would need to build in Q1 and Q2 be able to hit those types of numbers for the full year. And so if you think about what we’re looking at and seeing now in April, those large customers instead of being 7%, 8%, they have been growing still nicely, but more mid-single digits, right? And the big change here is this emerging biotech, another 20%, 25%. And instead of being up kind of mid-teens, they are actually down mid-teens and that comes back to everything that Rainer talked about with people really reprioritizing projects, conserving cash.

That happened both in the U.S. and we saw it in China as well. And I think I’d probably say it we saw modest headwinds as we entered the year. And those are just more pronounced now as we move through the quarter. So just as a – to maybe put some numbers to what Reiner said.

Rainer Blair: And then just to reiterate, to support a significant second half ramp, we would start to see that activity level increasing now and in the second quarter. And we’re just not seeing it to the degree that would support that.

Michael Ryskin: Okay. Thanks. And on the emerging biotech, just really hope to clarify. Are you seeing that softness in bioprocessing specifically or across in the life sciences segment as well? And then maybe I could transition that to a question on the instrument. You saw 5% growth or mid-single-digit growth in instruments in the first quarter. What’s your expectation for the rest of the year? Any particular pockets of weakness or strength you can call out?

Matt McGrew: Yes, I’ll comment on the bioprocessing broadly speaking, and maybe let Rainer talk about what we’re seeing in tools. The answer is yes. We’re seeing it in both. I would say that we have definitely seen the emerging biotech funding pressures here in the bioprocessing area. I would say we’re seeing it in the tool space or in life sciences as well. I would say that is a lesser portion, obviously, of our revenue. So it’s not quite as big of an impact. But are we seeing – yes, I would say we are seeing customers in those spaces conserving cash on both CapEx and OpEx.

Michael Ryskin: Okay, thanks.

Rainer Blair: So Michael, more generally on the Life Sciences here to your first question. So if we look at Q1, the life sciences based business finished as we thought at high single digits after low double-digit average growth over the last 3 years. And we’ve talked previously about the expected normalization of those growth rates here after having seen that elevated growth for the last 3 years. So that’s right within our expectations. If you look at that geographically, we saw strength in Western Europe and China, in fact, was up double digits on the back of some stimulus there. and North America was a little bit softer. And if you look at Life Sciences, from an end market perspective, large pharma R&D spending levels are still very quite healthy but they are starting to moderate just given the higher comps.

And now just connecting the dots to Matt’s commentary here, emerging biotech is impacted by the current funding environment, and we see smaller purchases, if you will, so rather than buying six, four instruments and in other places, really impacted in the less differentiated segments, let’s say. So we are seeing in our own business is not as exposed to that segment in life sciences but we do see it at the margin. And then life science research and academic is holding up well globally for life sciences. So we continue to believe our growth rates moderate to the historical levels in ‘23, and that’s what our value reflects. And that’s not a change to any previous expectations.

Michael Ryskin: Okay, thanks. I will get back in the queue.

Rainer Blair: Thank you.

Operator: Thank you. We will take our next question from Vijay Kumar with Evercore ISI. Please go ahead.

Vijay Kumar: Hey, guys. Thanks for taking my question. And congrats on…

Rainer Blair: Hi, Vijay.

Vijay Kumar: Hi, Rainer. And congrats on a good start to the year. I guess, just a high-level question on the guidance here, Rainer. All of us are looking at – if I go back 2 months ago, we were assuming back half – perhaps normalization in the industry. And given your comments here on emerging small biotech, that’s where it changes. Is this guidance now be risk because we’re assuming bioprocessing in line with Q1. Are we confident that Q1 was a low point for the year? So just give us some color on the thought process behind the guidance here? I mean, is this now dearest from a back half perspective?

Rainer Blair: So Vijay, I mean, we’re basing our view on the second half. Also based on what we’re seeing in the current market environment, which we just talked about as well as our order book. And like I said a minute ago, in order to support a higher guide for the second half, we need to see different activity levels here in Q1 and Q2. And that’s not the case for two reasons. One, the emerging biotech is quite significantly softer, down mid-teens as we just talked about. And then I would say on the margin, larger accounts are taking a little bit more time to burn through inventory, although they are doing that nicely. And those factors together have us believe unless there is any other sort of significant market disruption that the year will play out much as the first quarter has.

Vijay Kumar: Understood. And then just one on – Cepheid was a bright spot here, 30% growth. I think you made some comments about infectious disease, different testing test being really strong. Can you give us some color on the customers are seeing this ramp? Are these new customers that bought a Cepheid system during the pandemic, I am just trying to think how sustainable is that 30% growth in sort of related one here on M&A, some chatter about Danaher on the M&A side. Would Danaher be interested in getting into services? Or how should – maybe just remind us on the M&A lens and criteria that Danaher processes that pipeline?

Rainer Blair: Sure. So Vijay, on the Cepheid question, we’re really seeing a broad-based usage of the infectious disease menu. In fact, our broader menu in general, both at our existing installed base that’s been there for some time as well as with our newer customers as they start transitioning that COVID testing capacity that they have to take full advantage of that menu. So we see that 30% here as a good marker of how people appreciate the workflow advantages, the ease of use and the accuracy of the platform. Remember, we’re seeing two factors here. One, we see test transitioning from high throughput environment into the point of care on the one hand. And on the other hand, we see expanded usage of our testing menu.

Matt McGrew: Yes, Vijay, maybe just to kind of – to put a real-life example to that, I think. So if you think about what we’re seeing, we’ve got customers – existing customers today, we kind of goes both ways, right? So we’ve got existing customers today that, for example, will use Group A Strep. And those customers now sort of are also moving everything over to the four to one or to COVID as well. And then you’ve got the other way, which is that sort of installed base going from kind of 2x growth here over the last 3 years. You have got people who have used these systems now for many, many years. And what they are doing is they are starting to bring in new menu and that new menu has been around infectious disease first, which is primarily right now, were largely Group A Strep.

So, you are kind of having somebody who used the box throughout COVID testing, using it on for COVID four-and-one, and stand-alone. And now they are bringing on Group A Strep as well. And so that’s what we always kind of talked about with COVID being an anchor assay as we go forward, larger installed base, anchor assay, now you move into infectious disease, there will be other opportunities to pull in sort of other menu as we go forward. But that’s exactly the type of thing we are seeing play out here. And that’s – it is encouraging. Early days yet, I mean and also still some lower base these are off of lower numbers. But as we go forward, we have sort of talked about next year and the longer term. That’s why I think that installed base growth was so important because we have got the menu, be able to pull through and then the additions of the new menu are going to be only helpful on that larger installed base.

Rainer Blair: So, on M&A, Vijay, obviously we don’t comment on chatter. But what I would tell you is we really like the way we are positioned. Our balance sheet is in great shape. Valuations continue to moderate, perhaps the one or the other Board is not quite there yet, but we do see more realism in the many discussions that we have across the board as always. And specifically, as we have said in the past should our customers tag on this and on our help and services, that’s not something that we are going to ignore. But once again, that’s just one of several opportunities. I think the most important thing to remember is that we are not going to deviate from our disciplined approach. It’s got to be the right end market. It’s got to be the right target and the model has to work. And it’s when those three lights flip green that we execute.

Matt McGrew: Yes. I think Vijay, too, I mean I think as we sit here, I think it’s – not saying this is ‘08, ‘09, but having a balance sheet that we have got right now and being able to kind of be flexible, I think is important in times like these because as Rainer said, when the market company valuation all line up, we are ready to go. But we do need to see all three of those. And as things get a little choppier here as they might get a little job here, I think I really like how we are kind of set up here from a balance sheet perspective as well.

Vijay Kumar: Thanks Matt.

Rainer Blair: Thanks Vijay.

Operator: We will take our next question from Scott Davis with Melius Research. Please go ahead.

Rainer Blair: Good morning Scott.

Scott Davis: Hey. Good morning guys. Rainer, Matt, and John good morning. Rainer, you have said – you made a reference in your prepared remarks to kind of incremental cost-out. I think I probably asked this question last quarter. But can you give us a little bit of granularity or color at least on what you are talking about? Is there a structural cost-out? Is it more of just taking out some of that – some of those kind of temporary costs that came in during COVID that now are unnecessary, or is there an actual attempt to go after some of the structural costs that perhaps you couldn’t have gone after before?

Matt McGrew: Yes. Scott, maybe I will take a crack at it. Yes, like we talked about in the prepared remarks, we are sort of going from an adjusted OP – adjusted operating margins of 31 in our previous guide to 30. And I think the way to think about it is sort of twofold, half of that is just the volume, right. Like – and most of that is all of that activities in bioprocessing. But the other half is capacity reduction costs. I would say that that’s going to be two places. It’s going to be in biotechnology and then as importantly, and more importantly, probably at Cepheid. Like you said, we have always sort of known we were going to get to an inflection point here at some point where we were sort of making the call that we have moved into an endemic phase.

And once we moved into an endemic phase, we were going to need to bring some of the capacity that we have been running at it Cepheid down. And so I think just as a reminder, in Q4 last year, we did 20 million respiratory tests, and that was only three months ago. But I think you have really seen a tail off here as we have entered into the last couple of months. And I think our team is pretty clear that we are now kind of entering a new phase of volumes that we will need. And so we are going to be getting after some of that. And I think what does that look like, it’s talking about closing and consolidating some of the plants that we have got. Some of those were frankly put up quickly in locations that were not ideal for the longer term because we are trying to meet the needs of a pandemic.

So, we are going to get after a couple of those sites. We are going to reduce some of the headcount and then we are going to go after indirect and fixed overhead costs as well, reducing shifts, etcetera, etcetera. So, those are the types of things we are going to be going after here. That’s largely going to be in the second quarter and third quarter is when you are going to see the costs sort of roll through. So, you will see that in the margin in those two quarters and then to sort of pop back a little bit. And then maybe just to give you some sense of what’s that look like in – once we are done with that kind of in Q4 and as we head into ‘24, Scott, I think Cepheid in 2019 was a 20% to 25% OP business, during the peak of the pandemic here, it probably was north of 45%.

And after we get through what we are going to do in the next couple of quarters, like I have said on the capacity reduction side, starting kind of in Q4 and heading into ‘24, they are going to be 35% to 40% margin, right. So, meaningfully up from where we were given the volumes that we have now, it’s a much bigger business, but not quite at the peak pandemic where I was getting a lot of volume leverage, but that gives you a sense of what we are going after, what we are trying to do and where we end up on the other side.

Scott Davis: That’s super helpful, Matt. Can you guys just remind us what – where is your – the size of their installed base in Cepheid today versus pre-COVID, I know I have – I am sure having the note somewhere, but to just make a little easier on…?

Matt McGrew: Yes. 2x, Scott, we are about 50,000 today. Started probably like 2019.

Scott Davis: Alright. Perfect. I will pass it on. Thank you, guys. Good luck this year.

Matt McGrew: Yes.

Rainer Blair: Thanks Scott.

Operator: We will take our next question from Dan Brennan with TD Cowen. Please go ahead.

Rainer Blair: Good morning Dan.

Dan Brennan: Great. Thank you. Good morning. Thanks for the questions guys. Maybe just one on bioprocess to start out, just – could you help us think through like what is the magnitude of that destock drag that’s kind of baked in guidance? I know you gave a lot of color earlier in the Q&A. And then related to that, or emerging bio, it’s certainly a bigger group than we thought as a percentage of that segment. Any color kind of what that grew in ‘22 and kind of the quick math to get to low single for the year? If it’s 30% of revenues, I guess you are assuming some improvement there because if we kept it down 15%, I don’t think we would get to up low single for the year.

Matt McGrew: Yes. So, maybe – again, maybe the way to think about it, Dan, is that sort of the larger customers that are really where we are seeing the inventory drag. That was sort of – we initially thought we would see that in the high-single digits, call it, 7%, 8%, and that’s a little bit lower now, call it, 6% and change. And so I think the inventory destocking is flowing through in the larger customers, and you are seeing it at a slightly lower growth rate that we saw in Q1 and we are expecting them to see for the full year. So, that’s how I would sort of frame what the inventory destocking is. The rest is really, like I talked about earlier, emerging biotech and sort of the other 25% of our customers, we thought that, that would be a low teens type growth rate here for the year.

Combine that with the 8% that we thought we would see in the larger, that’s how we get to high-single digits. That low teens is actually negative mid-teens, right, with all the pressures we talked about. So, I would say that we are just sort of assuming that that type of growth rate for the rest of the year for that customer base and that we are going to have – the larger customers will be more in the mid-single digit like I talked about. That’s what we are kind of assuming for the year. And based entirely on what we saw in Q1, the order book in Q1 sort of not being supportive, frankly, of, in our minds, at least, the ability with the limited visibility we have or more limited visibility, just not supportive of being able to say that we think we can get back to high-single digits.

I think you asked a question of what those customers were there last year. That entire business largely was up in line with what we saw last year, which is as you remember, mid to high 20s. So, kind of you sort of look at mid to high-20s with that group of folks, now they are sort of down mid-teens, still a very solid growth on a 2-year basis, but it is what we are seeing right now.

Dan Brennan: Got it. And then thanks Matt. And then may be on the margins and the earnings, so we are coming out somewhere kind of $925 million, $930 million for the year. Just wondering if you guys – you kind of put the pieces together. Is that kind of the rates of code? And given the cost actions you are taking this year, does that set yourself up in ‘24 for like potentially higher than normal operating leverage, depending on what the top line comes in at?

Matt McGrew: Yes. No, I mean I think if you are going through the full year, the math is what it is at around 30% adjusted OP margins, I think sort of that takes care of itself. As far as what we are going to look like as we sort of get to the other side of this. I mean I talked a little bit about Cepheid kind of was 20% to 25% pre-pandemic, peaked up at 45% and 35% to 40%. I mean I think if you sort of use that frame plus what we have in diagnostics, that sort of gets you where we think roughly the margin profile will be. Biotech is probably the other one after we get through some of these costs. The same math there was biotech was, call it, high 30s prior to the pandemic. Again, it peaked at around, call it, 45% and change.

And after we sort of get through what I think we are going to do there, they are probably going to be more like low-40s. So, again better than they were pre-pandemic given the fact that they are a bigger business. But those two pieces, I think you can slide into what ‘24 might look like. And then life sciences, that should be kind of plus or minus where we have been here. That has not been a margin that’s moved around quite a bit. A little bit of COVID stuff as we had in ‘22 and ‘21, but I think you can kind of get a sense of what the margins are there. So, maybe it’s just a high-level framework, you are probably high-30s, low-40s with Cepheid, you can kind of assume some other stuff for the diagnostics, biotech, probably low-40s than what we are seeing in LS.

But we will obviously sort of come back to that later, still pretty early in ‘23, but just to give you a very high level view.

Dan Brennan: Great. Thanks Matt. Thanks guys.

Rainer Blair: Thanks Dan.

Operator: And we will take our next question from Jack Meehan with Nephron. Please go ahead.

Rainer Blair: Good morning Jack.

Jack Meehan: Thanks. Good morning. Another question on bioprocessing. Can you share what was your total order rate in the quarter? Is there any color you can just share around how the quarter played out? Have things weakened throughout the quarter. Just curious about how things are trending.

Rainer Blair: Sure, Jack. So, once again, first quarter, our orders were down modestly sequentially. So, relative to the fourth quarter, down modestly. But year-over-year, they declined 20%, okay. And so what we have been seeing is the inventory burn down that we have been talking about Matt and myself, is occurring, and we see that in our order book here for the first quarter. And then again, we have laid out why we believe that the current activity level supports sort of a similar progression of the quarters here throughout the year as we had in the first quarter.

Jack Meehan: Great. Thank you. And then just as a follow-up, I was curious what impact, if any, did you see from the banking crisis, which took place in the quarter. I understand you probably didn’t have any direct exposure to that, but how are your customers reacting sort of across the business?

Rainer Blair: Right. So, direct exposure was not material in any sense of the word. As it relates to the impact on our businesses, particularly in bioprocessing, to a much lesser extent in life sciences, we do think that, that provides that additional inflection point here in the first quarter for liquidity tightening up and that prioritization that we are seeing here in the emerging biotech segment, call it emerging biotech, and once again, those companies working on earlier stage projects. So, that’s where we have seen a more pronounced conservation of cash and that plays out in OpEx, CapEx and you can – and we talked about how that played out with mid-teens contraction as opposed to sort of a mid-teens growth versus prior periods.

Jack Meehan: Thank you, Rainer.

Rainer Blair: Thanks Jack.

Operator: And we will take our final question from Rachel Vatnsdal with JPMorgan. Please go ahead.

Rainer Blair: Good morning Rachel.

Rachel Vatnsdal: Great. Good morning. Thank you for taking the questions you guys. And so I appreciate all the comments that you have given on emerging biotech softness in bioprocessing with that customer set really down mid-teens in 1Q. So first, just a clarifying question. Did you say that you expect that emerging biotech to remain at mid-teen declines for the year? And then kind of shifting more longer term, can you talk about your assumptions around when you expect emerging biotech to return to growth? And at what point can this funding issue really pressure the long-term growth outlook for the bioprocessing market?

Rainer Blair: So, just to confirm on the topic of emerging biotech, our assumption is and our guide reflects that the activity level in emerging biotech stays for the remainder of the year as it played out in the first quarter. So, we are not assuming any change there including that it doesn’t get significantly worse. Now, as it relates to how that segment progresses here, that’s from today’s point of view, hard to predict. We need to see where capital markets go, liquidity availability and yes, a stabilization and return to some degree of normality in the banking sector. But for the visibility that we have today, we are not expecting an improvement in that segment for the remainder of the year.

Rachel Vatnsdal: Got it. And then maybe a few questions on China here. So, one of your peers recently signed China bioprocessing, I think you also mentioned that in one of your answers to earlier question. So, can you talk about how did bioprocessing performed during 1Q in China? And can you just give us some context of how big China is for bioprocessing for Danaher? Looking forward, how are those orders trending within China, specifically around some of the localized manufacturers. And then last question, just stepping back, you previously had guided to low-single digit growth for China for the year. 1Q was well above expectations. So, what’s the total co-outlook for China? Thanks.

Rainer Blair: Well, as it relates to bioprocessing in China, we have had a very good and strong business there in China for years. And it helped quite significantly in China in order to build the capacity for vaccines and for other biologics. And what we see today, much like we have seen in the U.S. is that the Emerging Biotech segment, which is an important part of China’s efforts to build a local biopharma industry is also impacted by capital constraints. So, we have seen that play out in China as well. And in fact, that’s what is the primary impact on our China numbers here. In the first quarter, which on the whole were better than expected, primarily because of the patient volumes and the diagnostic businesses being stronger.

Now, as it relates to the full year in China, we expect our full year in China to be up low-single digits for Danaher overall based on the market recovery, exiting COVID as well as, if you will, a normalization of the activity level in bioprocessing.

Rachel Vatnsdal: Great. Thank you.

Rainer Blair: Thank you, Rachel.

Operator: Thank you. And I will turn it over to the speakers for closing remarks.

John Bedford: Thank you, Ashley. I appreciate everyone for joining us on the call today. We will be around all day and rest of the week for the follow-ups.

Rainer Blair: Thanks everyone.

Operator: Thank you. This does conclude today’s program. Thank you for your participation. You may disconnect at any time.